401K withdrawal

[jryanruss23]

I just changed jobs and am going to cash out one of my supplemental 401ks because I really need it (life event). That account is 80% a Roth 401k and 20% is traditional. The retirement firm is requiring a mandatory 20% hold of my funds for taxes; however, I won't have to pay taxes on the 80% that is Roth, only an early withdrawal fee. How do I recoup the majority of this 20% they are withholding?

[conniem123 · Accepted solution]

Hi jryanruss23,

I understand you will be withdrawing from your retirement accounts in 2023.  Withholdings are a method for us to "put away money" to pay our tax liability when we file our tax return.  Just like withholdings from your wages that are reported on your Form W-2, those withholdings may be more than your tax liability when you prepare your tax return, and you receive a refund.

Your retirement withdrawals will be reported to you on a Form 1099R.   One of the items on the Form 1099R will be the federal tax withheld.  You will enter the data from the Form 1099R.  Once all your income and deductions are entered, then your tax liability is calculated.  The withholdings, combined from your wages (Form W-2) and from your retirement distribution (Form 1099R) will decrease your tax liability.  If your withholdings are more than your tax liability you will receive a refund.

I hope you find this helpful!

Connie 

[KatherineS63]

I have a few questions for you:  

Have you had your Roth for more than 5 years?  What is your age?  

The rules for Roth withdrawals are that you can take out the principal and not pay taxes if it has been in the account for over 5 years.  Any withdrawals that are more than the principal, could be taxed and there then could be a penalty as well. (10%)

If you are 59.5 years or older, there are no restrictions.  

As far as the withholdings, you will get any extra withholdings back when you do your taxes in 2024 for year 2023.  

The above is just a simple response and I recommend you click this link to see exactly what the IRS says about your situation:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals

This link might be easier to understand because it is from Intuit:

https://blog.turbotax.intuit.com/retirement/roth-ira-withdrawal-rules-and-penalties-53233/

Please let me know if you found this helpful!!

[jryanruss23]

Yeah, I have had the account for more than five years, but no where close to 59 1/2. This is the first I've heard about not having to pay taxes on the principal, just the excess over that. Thanks for the info!

[KatherineS63]

Look especially at the link from the Intuit that I attached in the prior post.  It will go over the ins and outs!!!

The sad part about taking Roth money out s that your gains, when taken out after 59.5 years old, are non taxable.   So it is a great way to earn money on an investment and then take it out later and t will be tax free!  Hope you are following me.

So maybe only take out what you need and leave some to grow.